First USA's Woes Rock Card Industry; Fee Strategies Called into

USA subsidiary sent shock waves through the credit card industry, which has delivered high rates of profitability without interruption for most of the decade.

Other big card companies may not face the specific issues that led Bank One chief executive officer John B. McCoy to say Wednesday that "there were a number of strategies with card pricing that didn't work." But the general perception is that other monoline credit card companies will be dragged down, if only temporarily, said W. Christopher Staab, an associate with Auriemma Consulting Group, Westbury, N.Y.

Bank One's earnings will be 7% to 8% less than analysts' projections, the company said, because of First USA's falling short in attracting new customers and retaining profitable ones. The problems stem partly from a penchant for charging late fees, which have grown increasingly common as card issuers see ways to hike revenue.

Competition has driven interest rates downward, but many banks have compensated for that. First USA chairman and CEO Richard Vague told an investor conference Wednesday that First USA has been undercharging its customers for credit, and that as a result some customers' annual percentage rates will rise.

MBNA Corp., which at $64.5 billion of receivables trails only Citigroup Inc. and First USA, was quick to distance itself from the latter's warning statement. It fired off a news release Wednesday to calm investors' worried that First USA's woes were an indictment of a whole industry.

"Industry problems are not impacting us," said MBNA spokesman Brian Dalphon. "We are growing. Our losses are stable. We are only losing 3% of the customer relationships we want to keep."

"The market will penalize the monolines more heavily than other banks," Mr. Staab said. That was the case on Wednesday as MBNA, Capital One Financial Corp., Metris Cos., and Providian all took beatings. (See related story beginning on page 1.)

Keefe, Bruyette & Woods analyst David S. Berry said First USA seems to be an exception. "My take is that First USA took its eye off the ball," he said.

Legislators and regulators, however, are wary of a more widespread problem in the card industry. The Office of the Comptroller of the Currency, tracking consumer complaints against card companies, has issued a warning about their frequency. First USA came in first by a wide margin in an OCC-released ranking, with 2,793 complaints recorded in the first half of this year. Of those, 511 were related to late fees.

"It's not surprising to me that rational consumers are leaving First USA," said Edward Mierzwinski, executive director of U.S. Public Interest Research Group in Washington. "The bank has been extremely arrogant in its charging of late fees to consumers who probably paid on time."

Much of the attention in Washington stemmed from class lawsuits that have accused First USA and Providian of unfairly charging late and other punitive fees. Providian is also being investigated by the San Francisco district attorney.

On Tuesday, Providian said an independent audit by Ernst & Young found no evidence that the lender is intentionally delaying the posting of cardholders' payments in order to assess late fees, as some lawsuits have charged. The San Francisco company introduced a new policy Tuesday allowing card customers to pay their bills via telephone "to avoid the uncertainties and possibilities of delay associated with paying by mail."

Industry experts say the biggest question for card issuers is how to remain profitable in a declining-price environment.

The industry "has seen 10 years of price reduction," said James B. Shanahan, principal of Business Dynamics Consulting Inc. in Newark, Del. Annual fees have virtually disappeared, and interest rates have come down dramatically. "The price game is almost played out," Mr. Shanahan said.

Responding to the changing economics, Providian and Capital One have stopped marketing so-called teaser rates, which offer as little as zero interest for a new customer's honeymoon period. "We ran the economics and decided we shouldn't operate that product," Mr. Petrini said.

First USA still markets introductory rates, which the company says have been lowered to 2.9%, from 5.9% last year. But First USA's share of direct-mail solicitations declined to 18% in the second quarter, from 34% at the end of 1997.

Mr. Vague said First USA plans to focus its marketing more carefully, targeting desirable segments. There will be a "reoptimization of the marketing spin," he said.

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